February Fed Preview: How Many Rate Hikes Are Left? (2023)

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Investors are expecting the Federal Open Market Committee (FOMC) to once again dial back the pace of its monetary policy tightening campaign at the meeting on January 31 and February 1.

At the December FOMC meeting, the committee eased interest rate hikes to 50 basis points (bps) from 75 bps. This time around, the Federal Reserve will likely raise rates by just 25 bps, and will also continue to allow up to $95 billion in assets to roll off its balance sheet on a monthly basis.

The Fed is trying to navigate a soft landing for the U.S. economy by bringing inflation back to its 2% long-term target while avoiding a recession. The S&P 500 is up 11.5% since the beginning of October thanks in part to investor optimism about cooling inflation, but the Fed will still struggle to decide when to stop hiking interest rates.

A Kinder, Gentler FOMC

The bond market is currently pricing in a 94.7% chance of a 25 bps rate increase on Feb. 1—and only a 5.3% chance of a 50 bps hike, according to the CME Group. If the FOMC meets expectations and opts for a 25 bps hike, it would bring the federal funds target rate to between 4.5% and 4.75%.

The bond market is pricing in a 78% chance the FOMC will raise rates by at least another 25 bps at its March meeting as well.

The Fed will most likely keep letting $60 billion in Treasury securities and $35 billion in agency mortgage-backed securities (MBS) mature and roll off its balance sheet each month. Its balance sheet has dropped from a record high of $8.96 trillion in May 2022 to around $8.5 trillion as of January, but it remains more than twice its pre-pandemic size of $4.15 trillion in February 2020.

In December, the FOMC updated its long-term U.S. economic growth projections, which suggest 2023 could be a difficult year for the U.S. economy. Fed economists project that the U.S. unemployment rate will climb from 3.5% as of December to an average of 4.6% in 2023. They also cut their 2023 U.S. GDP growth forecast to just 0.5%, and reduced the 2024 GDP growth projection to 1.6%.

(Video) The Fed's next move: Expectations for next rate hike decision

The FOMC anticipates core personal consumption expenditures price index will continue to rise by 3.5% this year, well above the Fed’s 2% target. Core PCE excludes volatile food and energy prices and is the Fed’s preferred inflation measure. The Bureau of Economic Analysis reported core PCE inflation of 4.7% in November, down from a peak of 5.2% in September.

The Labor Department recently reported that the consumer price index rose 6.5% in December, down from a 7.1% gain in November and a peak of 9.1% back in June 2022. On a monthly basis, the CPI declined 0.1%, yet another positive sign that inflation is finally trending downward.

The U.S. Economy Remains Resilient

The labor market has held up surprisingly well during the current tightening cycle.

On Jan. 6, the U.S. Labor Department reported the economy added 223,000 jobs in December, exceeding economist estimates of 200,000 jobs added. Perhaps the most encouraging news on the inflation front was that wages were up 4.6% year-over-year in December and just 0.2% on a monthly basis.

The most recent University of Michigan Consumer Sentiment Index reading also came in at its highest level since April 2022, suggesting shoppers are shrugging off economists and analysts predicting a recession in the first half of 2023.

Jeffrey Roach, chief economist for LPL Financial, says the University of Michigan survey is a clear sign consumers are convinced inflation is easing.

Inflation expectations are well-anchored and improving as pricing pressures are weakening across many sectors,” says Roach. “We shouldn’t be surprised if the Fed starts talking about pausing in the near future.”

DataTrek Research co-founder Nicholas Colas says Fed policies were the most dominant stock market catalyst of 2022, but a more stable price environment will likely make the Fed less of a factor for investors in 2023.

(Video) A 25 Basis Point Fed Rate Hike Is Not a Lock: Feroli

“Recent positive data points on wage and general price inflation, as well as better price action in global capital markets, strongly suggest that 2022’s ‘Only the Fed Matters’ paradigm will not be as useful in 2023,” Colas says.

Is a Fed Pivot Coming?

At the upcoming FOMC meeting, investors will be paying close attention to any commentary from Fed chair Jerome Powell that could hint at when investors should expect the Fed to stop raising rates and whether or not the Fed will pivot to rate cuts by the end of 2023.

Kavan Choksi, investor, founder, and business management and wealth consultant at KC Consulting, says the Fed is making progress on its path to normalized inflation, but investors shouldn’t get ahead of themselves anticipating a Fed pivot.

“Things are getting better, and so all eyes are now on the Fed to see whether they take their foot off the gas and hike rates less aggressively. Many market participants are expecting the Fed to start cutting rates before the end of the year, but it may be a little too premature to reach that conclusion at this stage,” Choksi says.

In the Fed’s Own Words

In its December meeting minutes, the FOMC said it will maintain a “restrictive policy stance” until economic data confirms inflation is on a “sustained downward path.” Committee members said it is “likely to take some time” before conditions may be appropriate for easing monetary policy. The FOMC discussed the risks of pivoting too quickly, noting that “historical experience cautioned against prematurely loosening monetary policy.”

In a speech at the Symposium on Central Bank Independence in January, Powell said restoring price stability can require the Fed to take “measures that are not popular in the short term as we raise interest rates to slow the economy.” Powell also noted monetary policy decisions must be data-driven and insulated from “short-term political considerations.”

In January, Federal Reserve Governor Michelle Bowman said inflation is “much too high” and the Fed still has “a lot more work to do” before its job is done. Bowman said she is looking for “compelling signs that inflation has peaked and for more consistent indications that inflation is on a downward path” before she determines how much higher the Fed should raise rates. Bowman also said once the terminal fed funds rate is reached, “it will need to remain at that level for some time in order to restore price stability.”

In the near term, investors will be watching upcoming speeches by Federal Reserve Vice Chair Lael Brainard at the University of Chicago Booth School of Business on Jan. 19 and Federal Reserve Governor Christopher Waller at the Council on Foreign Relations on Jan. 20 for more insights into the upcoming FOMC meeting.

(Video) Fed Gov. Chris Waller say he favors 25 basis point interest rate hike at next FOMC meeting

The Fed will also get a last-minute inflation update on Jan. 27 when the Bureau of Economic Analysis releases its December PCE data just four days before the FOMC meeting begins.

Federal Reserve FAQs

What is the FOMC?

The FOMC is the Federal Reserve’s monetary policy committee. It determines the direction of monetary policy by setting interest rates and directing open market operations. The committee has 12 members and meets eight times a year to examine the U.S. economy and vote on whether to alter the fed funds target rate or change the way open market operations are conducted.

How does the FOMC work?

The FOMC conducts open market operations to guide monetary policy, and increase or reduce the money supply in the U.S. economy. The Fed buys and sells government securities on a day-by-day basis to control the money supply, set bank reserve requirements and adjust the Fed discount rate. The Fed’s Board of Governors handles reserve requirements and the discount rate, while the FOMC conducts the open market operations.

(Video) Fed Rate Cut in 2023 Unlikely, IG Markets Says

Who runs the FOMC?

The 12 members of the FOMC include Federal Reserve Chair Jerome Powell; the other six members of the Federal Reserve Board of Governors (which is led by the Fed Chair); the president of the Federal Reserve Bank of New York; and four of the remaining 11 regional Federal Reserve Bank presidents, who serve one-year terms on a rotating basis.

When is the next FOMC meeting?

The FOMC meets eight times a year, holding a meeting once every six weeks. The committee can meet on an emergency basis if economic events get out of hand and the Fed believes it needs to act before the next scheduled meeting. Here are the dates of upcoming scheduled Fed meetings:

  • January 31 to February 1, 2023
  • March 21-22, 2023
  • May 2-3, 2023
  • June 13-14, 2023
  • July 25-26, 2023
  • September 19-20, 2023
  • October 31 to November 1, 2023
  • December 12-13, 2023

FAQs

What is the next Fed rate hike? ›

The Bankrate promise

Interest rates are going up. The Federal Reserve raised rates seven times in 2022 in an effort to curb inflation, and more rate hikes are on the way. On average, economists predict that the Fed will lift rates to 5.35 percent in 2023, according to Bankrate's Fourth-Quarter Economic Indicator poll.

Will Fed continue to raise rates in 2023? ›

Markets expect the Fed to continue to raise rates early in 2023, due to inflation concerns. Recent data has shown that U.S. inflation is declining. After topping a 9% annual rate in June, November CPI showed inflation at 7%. Still, that recent decline in the rate of inflation is insufficient in the Fed's view.

How many rate hikes in 2023? ›

However, the Fed sees broadly sees one or two more hikes than the market does in 2023 currently taking rates materially over 5%, whereas markets aren't sure rates will exceed 5%.

What dates will Fed raise rates? ›

The FOMC lowered the federal funds rate to 0% to 0.25% on March 15, 2020, to support the economy during the COVID-19 pandemic. The Federal Open Market Committee (FOMC) began raising interest rates in March 2022, and it expects to continue increasing rates throughout the year.

Is the Fed expected to cut rates again? ›

They're also expecting the Fed to quickly be forced to reverse some of those rate hikes, bringing the cost of borrowing money back down to 4.25-4.5 percent by December 2023. Fed officials, however, aren't expecting rate cuts until 2024.

Will savings rates go up with Fed rate hikes? ›

But competitive savings rates do tend to follow the federal funds rate generally, and will keep a steady rise as the Fed hikes its benchmark interest rate higher.

What will interest rates be at the end of 2023? ›

A sustained drop could push mortgage rates into the 5% range late in the second quarter or in the second half of 2023, but that's definitely not guaranteed. Mortgage Bankers Association (MBA): “Long-term rates have already peaked. We expect that 30-year mortgage rates will end 2023 at 5.2%.”

What is the expected range for Fed rates in 2023? ›

For the Fed's future meeting in March of 2023, the majority of investors expect the Fed to raise the federal funds rate to inside a range of 4.75% to 5%. But more than 33% of market participants (the largest portion) expect the federal funds rate to be back inside a range of 4.5% to 4.75% by November.

How high could interest rates go in 2023? ›

In its fiscal forecast, published in November 2022, the OBR predicted that the Bank Rate would rise from 1.6% in Quarter 3 2022 to 4.8% in Quarter 3 2023 and 4.5% in Quarter 3 2024.

What is the date of the next Federal Reserve meeting 2023? ›

The Federal Open Market Committee FOMC) meeting schedule 2023: January 31-February 1. March 15-16* May 3-4.

Will interest rates go down again in 2024? ›

Scotiabank forecast the UK's key interest rate to rise to 4.25% in 2023, and decline to 3.25% in 2024.

What will home interest rates look like in 2023? ›

Evangelou expects rates to average around 5.7% in 2023. That's significantly higher than the rates around 3.5% that buyers saw in the first months of 2022, but it's also a far cry from the rates that climbed above 7% last fall.

How many interest rate hikes in 2022? ›

The Federal Reserve raised the federal funds rate seven times in 2022, with more on the way in 2023.

How many Fed meetings in 2022? ›

Meeting calendars, statements, and minutes (2018-2023) The FOMC holds eight regularly scheduled meetings during the year and other meetings as needed.

How long will interest rates be high? ›

Will interest rates go up or down? An interest rate forecast by Trading Economics as of 15 December predicted the Fed Funds Rate would hit 5% in 2023, before falling back to 4.5% in 2024.

Will Fed lower interest rates in 2023? ›

Fed Expects No Interest Rate Cuts In 2023: One Official Warns Of 'Costly Error' If Central Bank Backs Down Too Soon.

Which bank gives 7% interest on savings account? ›

Do Banks Offer 7% Interest On Savings Accounts? 7% interest isn't something banks offer in the US, but one credit union, Landmark CU, pays 7.50% interest, though there are major requirements and stipulations.

Should you save when interest rates rise? ›

As a general rule, you should start with whichever has the highest interest rate. So if you're earning more in interest on your savings than you are paying on your home loan, save your money instead.

Do people save more when interest rates rise? ›

An increase in interest rates may lead consumers to increase savings since they can receive higher rates of return. This is outlined in the marginal propensity to save.

Should I lock in my interest rate? ›

Most borrowers are attracted to the certainty a fixed-rate home-loan product offers, especially those who are budget-conscious. In fact, it is advisable for first-home buyers to take on a fixed-rate loan to be able to organize their budgets easily and to stay on top of their repayments.

What will interest rates be in 2024? ›

“Our view that interest rates will be reduced from 4.5 per cent to three per cent by the end of 2024 envisages more cuts than either the consensus or the markets.”

How high could mortgage rates go by 2025? ›

Mortgage costs could go up 30%

The bank makes the assumption that in 2025 and 2026, variable rate loans will cost 4.4 per cent in five years, while fixed rate loans will be slightly higher at 4.5 per cent.

How high will prime rate go? ›

CBC News noted that out of 19 Federal Reserve officials on the monetary policy committee, 17 said the Fed's target interest rates would have to rise above 5% in 2023. This means that the rates borrowers would have to pay would be much higher. This could bring U.S. prime rates above 7% in 2023.

What will happen to mortgage rates in 5 years? ›

Interest Rates Will Go Up

The average rate on a 5-year fixed mortgage is forecast to rise by 0.3% this year, rising further to 1.2% next year and 2.1% in 2024.

Should I fix my mortgage for 2 or 5 years? ›

The longer the fixed term, the higher the risk that average rates fall below yours and you pay more than you'd otherwise have to, you also lose some flexibility. Based on the current economic predictions for 2023/24 a 2 year fixed rate could be a good idea if you are able to lock in a good rate before the end of 2022.

What is the date of the next Federal Reserve meeting 2022? ›

The Federal Open Market Committee FOMC) meeting schedule 2022: January 25-26. March 15-16* May 3-4.

What date is the next Fed meeting? ›

Here are the dates of upcoming scheduled Fed meetings: January 31 to February 1, 2023. March 21-22, 2023. May 2-3, 2023.

What dates will the Fed raise rates in 2022? ›

With the Fed's September decision made, there are now two monetary policy decisions left in 2022. These rate decisions are scheduled for November 2 and December 14.

How many rate hikes are expected in 2022? ›

In September, with inflation still running stubbornly hot, the Federal Reserve increased the target for the federal funds rate still another 0.75% to a range of 3% – 3.25%. The Federal Reserve also released median projections showing that they anticipate the target rate to be 4.4% by the end of 2022.

How many FOMC meetings this year? ›

Meeting calendars, statements, and minutes (2018-2023) The FOMC holds eight regularly scheduled meetings during the year and other meetings as needed.

What time is the Fed Reserve announcement? ›

The daily and weekly statistical releases scheduled for today will be released on Tuesday, January 3. 1:00 p.m.

What is current Fed rate? ›

The Federal Reserve raised the fed funds rate by 50bps to 4.25%-4.5% during its last monetary policy meeting of 2022, pushing borrowing costs to the highest level since 2007, and in line with market expectations.

Will the interest rates go down in 2023? ›

After home financing costs nearly doubled in 2022, some relief is in sight for potential homebuyers in 2023. The interest rate for a 30-year fixed-rate mortgage in the U.S. is expected to drop to 5.25% by the end of this year, according to a forecast by the financial services website Bankrate.

What will happen to interest rates in 2023? ›

In its fiscal forecast, published in November 2022, the OBR predicted that the Bank Rate would rise from 1.6% in Quarter 3 2022 to 4.8% in Quarter 3 2023 and 4.5% in Quarter 3 2024.

What will interest rates be in 2023? ›

The Federal Reserve's projections released after their December meeting showed that in 2023 the bank expects the FFR to average around 5.1 percent.

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